Banking, if done honestly, ought to be a pretty lucrative business, right? You take money from depositors, lend it to borrowers and keep a 2-3 per cent spread in between. Why, then, do so many bank failures/ frauds occur with great regularity, oftentimes resulting in a bail-out, where tax-payer money is used to rescue the bank, or a bail-in, where depositor money is used. And, given the fact that depositors contribute many times more money than shareholders do, why is it that bank managements often cite shareholder pressure for returns to impose charges on depositors?
Bank failures are a global phenomenon. The 2008 global financial crisis was caused by some banks that made schoolboy errors in granting loans to sub-prime borrowers, and sometimes NINJAs (no income, no jobs, or assets), to buy homes. The banks, after originating the loan, de-risked themselves by packaging the loans and selling slices of it to retail investors. The US Government bailed out the biggest names in banking to avert a crisis of confidence, considering them too-big-to-fail.
The feeling that they are considered too big to fail allows the big banks to arrogate to themselves the notion they are infallible. So, now, 12 years later, we still have banks everywhere making mistakes, and waiting to be bailed out, and damn the customers!
In the US it is Wells Fargo, which once enjoyed a stellar reputation. Under shareholder pressure, its management sought to show ‘growth’ to investors by convincing/cajoling/deceiving its existing customers to open multiple accounts with it, often unbeknowest to them, in 2016. A WSJ article last week called it ‘A Wonderful Bank that made terrible mistakes’. Its Q4 (December quarter) profit plunged due to a $1.5-billion charge emanating from the fake accounts, and profits plunged 53 per cent. This is a bank Warren Buffet owns 8.8 per cent of, worth $19 billion.
In Europe Germany’s Deutsche Bank has a huge exposure in derivatives and is trying to restructure itself. The failure of a bank as large as Deutsche would impact the German economy, the strongest in Europe. Already, Germany's aut’mobile industry, one of its strengths, is facing a slowdown. Germany, which has arguably the best automobile makers, is to cut 400,000 jobs over the next decade in this sector.
The fall in auto demand has geopolitical implications. According to a story last week in The Washington Post , Trump threatened Europeans with a 25 per cent tariff on auto imports if they did not accuse Iran of breaching the nuclear deal, which Germany, France and Britain did.
Last week saw an Italian Bank, Popolare di Bari, was rescued by other banks, at the regulator’s behest, with a 1.4 b. Euro capital injection [3]. Much like Indian banks, its problems stemmed from lending to cronies after poor due diligence.
Move over to China. The Agricultural Bank of China is the third-largest global bank in terms of deposits, with $3.3 trillion in assets. One would think it had enough resources to properly safeguard the deposits. Yet a mid-level manager, Ren Xiaofeng, with the help of colleagues managed, in 2006, to steal bundles of notes from the vault, in order to invest in lotteries!
In India, bank frauds and scandals occur with exhaustive frequency. Last week, according to a story in Moneylife , the CEO of one Leo Meridien Infrastructure was arrested for defrauding banks of ₹1,700 crore, apparently by pledging land already sold!
This is appalling! One, it indicates that land records need to be urgently digitized and not in the hands of a bribable ‘talati’ or local official. Leo Meridien had apparently, bribed him. Two, it questions the process of assessing the loans, and the ability of bank officials to do due diligence.
The price of this is paid, of course, by the depositors, on whom limits of withdrawal of his own money are imposed. Unless harsher punishments are swiftly meted out to both the defaulters as well as bank officials who don’t do proper due diligence, such crimes will recur. It is always the individual citizens, unable to fight a corrupt and venal system, who suffer. Under a Supreme Court order, a 19-storey apartment building in Kerala was demolished for flouting CRZ norms. Surely, the building must have received a municipal certificate? Was this obtained fraudulently? If so, are those guilty of granting it also penalised, or is it only the buyers who can’t fight the system? Can the Government/State prepare a checklist of things necessary for buyers to verify?
Stock markets did not react much to the news that a Phase-1 US-China trade deal has been signed. Perhaps they are awaiting a tweet by Trump that he will not tear it up, or affirmation that China will stick to its end of the bargain.
The lackadaisical approach of banks can trigger another global crisis.
The writer is India Head — Finance Asia/Haymarket. The views are personal.